Global Markets: "The Fear Is Still Out There"

The European stock markets started the week in positive territory after last weeks substantial downturn. But the fear is still out there, and by noon Monday several major stock indices are back in the red as the dollar slides and commodities rise. Are the analysts too optimistic and the investors too pessimistic?

“All in all we maintain a positive market view and believe that the end of the correction is in sight.”

Orion Securities

Most European stock markets continue to slide Monday, as currency and commodities struggle to find a direction and U.S. index futures drops.

With a fall of 0.5% last week Wall Street was off to a weak start of the year.

European stock markets fell 2-3%, while the Oslo Stock Exchange ended down 3.2%.

Uncertainty around public finances in Greece, Portugal and Spain was an important driver for the decline.

Disappointing Initial Claims numbers from the U.S. questioned the improvement in the U.S. labor market.

While most economists estimate that the number of available should be reported under 420.000-430.000 for it to be consistent with rising employment, it was reported about 480,000 new job last week.

The U.S. employment report, however, gave some support to the market. It showed that unemployment fell from 10.0% in December to 9.7% in January.

The number of employed however, fell by 20,000 to an expected increase of 15,000. “We interpret the figures to suggest that the U.S. labor market is the gradual improving, but it will take time before we see a substantial increase in employment,” the Norwegian brokerage firm Orion Securities writes in a note to their clients Monday.

“In commodity markets there was also a broad decline driven by risk aversion and strong dollars.”

Oil prices fell 2.6%, while aluminum and copper fell respectively 5.5% and 8.9%.

In the bond market long prime interest rates moved slightly higher, while credit extended further.

Risk premiums on government debt for countries around Mediterranean continued to expand.

In the currency market the dollar rose 6 cents to dollars, while the euro fell by 3 cents. The dollar rose 1.4% against the euro.

A New Crisis Or The End Of  A Correction?

“The last two weeks of decline may mark the end of last year’s ascension, but not the start of a new market decline,” analysts at Orion Securities writes.

“We envision a positive exchange of these levels, but a fairly flat market for 2010 as a whole. Our expectations based on the following:”

The global economy has bottomed out and will expand in the future. However, there is uncertainty associated with when, and how quickly, the U.S. employment will increase. Historically, employment starts to pick up approximately six months after the economy out of recession. Therefore we should see growth soon if the history repeats itself. Last weeks Initial Claims numbers can indicate that growth will come later rather than sooner, but the positive trend does not seem to be broken. The U.S. employment report Friday indicated that unemployment moves towards a gradual improvement, and that employment rates have moderated.

Limited risk of another financial crisis. Greece is struggling to finance its national debt, and the challenges for Spain and Portugal is rising. With further global risk aversion may companies once again get trouble with refinancing, that in turn can lead us into a new financial crisis. We doubt, however, this scenario and believe the financial markets will stabilize and that the current fears are exaggerated.

The global stock exchanges are affordable given the analysts’ earnings expectations. Earnings estimate for S&P’s 500 is 78 for 2010, rising to 94 for 2011. Forward P/E has peaked since January, and fell from 15.0 to 13.3. As long as the global economy growth does not derail the downside is probably limited at the current level.

Analysts and investors disagree in terms of the future. While analysts believe in a V-shaped rebound performance, investors are more pessimistic. This is reflected in the pricing of the stock market in 2010 – and 2011-estimates. We think the analysts are somewhat optimistic, and that investors are too pessimistic.

The U.S. companies earnings reports have surprised on the upside this season. Strong results have been driven both by higher than expected revenue growth and effective cuts in costs. Attractive valuation and strong corporate figures underpin our fundamentally positive outlook.

History has a tendency to repeat itself. In the five-year rising market from 2003 to 2007, we saw seven corrections. On average, it took between six and eight months between each correction. There are now seven months since the correction in June 2009. The decline we have witnessed the last three weeks has several similarities with the previous ones.

U.S. listed companies are currently valued at only 13.3 times estimated earnings over the next twelve months. This is the lowest level in seven months and well below the long-term historical average is around 15. As long as the upswing in the global economy don't derail, and a new recession gets a grip, it is probably a modest downside at these levels. But how big is the risk of another recession? It can in no way be amortized, and it's probably premature to anticipate such worries at this point.

“All in all we maintain a positive market view and believe that the end of the correction is in sight,” the analysts concludes. “Risk aversion has increased because of the uncertainty surrounding Greece, Portugal and Spain, but this should not put a significant damper on global growth prospects.”

Will the uncertainty undermine the price of oil?

“The uncertainty has dragged the euro down, and the dollar has continued to strengthen. Greek credit spreads has gone to new record levels and has dragged Portugal and Spain along with them. Uncertainty associated with some of the countries in the euro zone pushed the euro down to its lowest level against the dollar in seven months. Historically, a rising U.S. dollar has been negative for oil prices and commodities in general. If the unrest related to Greece, Spain and Portugal increase in strength, it could put a damper on oil prices and Oslo Stock Exchange. Anticipation of cold weather in the eastern part of the United States will, however, support oil prices in the coming weeks. In the short term we believe the markets will be characterized by high volatility and uncertainty.”

The Norwegian brokerage firm has 2 buy recommendations at Oslo Stock Exchange this week:

1. Simrad Optronics

2. Atea

Here’s the full research note from Orion Securities (only available in Norwegian).

European Markets Snap Shots:

Oslo Stock Exchange (OSEBX)

Frankfurt Stock Exchange (DAX)

(With Relative Strength Index and On-balance Volume Indicator)





Related by the Econotwist:

Denmark In Danger Of Becoming The “New Greece”

Dissecting The U.S. Labor Report

Nordic Central Banks Agree On Baltic Bank Bailout

Greece: From Bad To Worse?

Fears “Dutch Disease” In Norway

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Filed under International Econnomic Politics, National Economic Politics